Q: Which formula correctly calculates average product (AP) of labor?

$$AP = \frac{\text{Total Product}}{\text{Total Units of Labor}}$$

Q: Suppose a firm’s total revenue is $$200,000 and its total cost (including opportunity costs) is 180$$,000. What is its economic profit?

$$\text{Economic Profit} = \text{Total Revenue} - \text{Total Cost} = 200,000 - 180,000 = 20,000$$

Question 1

A firm invests $$100,000 in new equipment and earns 15$$,000 per year in net income from this investment. What is the rate of return, and what does it represent?

Accepted Answer

The rate of return is $$\frac{15,000}{100,000} = 0.15 or 15$$%, representing the annual net income as a percentage of the total investment.

Question 2

Which of the following best describes the difference between economic profit and accounting profit?

Accepted Answer

Economic profit includes both explicit and implicit (opportunity) costs, while accounting profit includes only explicit costs.

Question 3

A firm faces the following costs: $$50,000 in wages, 30$$,000 in materials, and $20,000 in foregone interest from capital. What is the firm's total economic cost?

Accepted Answer

Total economic cost is $$50,000 + 30$$,000 + $$20,000 = 100$$,000.

Question 4

If a firm chooses a labor-intensive technology, which of the following is most likely true?

Accepted Answer

Labor is relatively cheap compared to capital.

Question 5

Which formula correctly calculates average product (AP) of labor?

Accepted Answer

$$AP = \frac{	ext{Total Product}}{	ext{Total Units of Labor}}$$

Question 6

A firm is deciding between two production methods. Method A costs $$10 per unit, and Method B costs 8 $$per unit for the same output. Which method should the profit-maximizing firm choose and why?

Accepted Answer

Method B, because it minimizes cost for the given level of output.

Question 7

If the marginal product of labor (MP_L) is declining as more workers are added, which law is being illustrated?

Accepted Answer

Law of diminishing returns

Question 8

Suppose a firm’s total revenue is $$200,000 and its total cost (including opportunity costs) is 180$$,000. What is its economic profit?

Accepted Answer

$$	ext{Economic Profit} = 	ext{Total Revenue} - 	ext{Total Cost} = 200,000 - 180,000 = 20,000$$

Question 9

Which of the following best describes an isoquant?

Accepted Answer

A curve showing all combinations of labor and capital that yield the same output.

Question 10

If a $1 tax per unit is imposed on a good, what happens to the supply curve and market equilibrium?

Accepted Answer

The supply curve shifts upward, resulting in a higher equilibrium price and lower quantity demanded.

Question 11

Which side of the market bears more of the tax burden when supply is more elastic than demand?

Accepted Answer

Buyers (demand side) bear more of the tax burden.

Question 12

A firm is operating in the short run. Which of the following is true?

Accepted Answer

At least one factor of production is fixed.

Question 13

If the marginal product of capital (MP_K) is $$5$$ and the price of capital (P_K) is $$2$$, while the marginal product of labor (MP_L) is $$10$$ and the wage rate (W) is $$5$$, what is the marginal rate of technical substitution (MRTS)?

Accepted Answer

$$MRTS = \frac{MP_L}{MP_K} = \frac{10}{5} = 2$$

Question 14

Which of the following best explains why capital and labor are considered complementary inputs?

Accepted Answer

One is useless without the other; both are needed to produce output.

Question 15

If a firm’s marginal product of labor (MP_L) is $$8$$ and the wage rate (W) is $$4$$, while the marginal product of capital (MP_K) is $$6$$ and the price of capital (P_K) is $$3$$, which input should the firm use more to minimize cost?

Accepted Answer

Labor, because $$\frac{MP_L}{W} = \frac{8}{4} = 2 is $$greater than $$\frac{MP_K}{P_K} = \frac{6}{3} = 2$$, so both are equally cost-effective.

Question 16

Which of the following statements about the law of diminishing returns is correct?

Accepted Answer

It occurs when more variable input is added to a fixed input, causing marginal product to decline.

Question 17

If a firm’s average product (AP) of labor is rising, what can be said about the marginal product (MP) of labor?

Accepted Answer

MP is greater than AP.

Question 18

Which of the following best describes the relationship between risk and return?

Accepted Answer

Riskier firms or investments are expected to have higher returns.

Question 19

If the elasticity of labor supply is negative at high wage rates, what does this imply about workers’ behavior?

Accepted Answer

Workers prefer more leisure instead of working more hours.

ECON 101 Chapter 7: The Production Process: The Behavior of Profit-Maximizing Firms

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